Reducing Risk In Property Investment

Investing in real estate is a long-term plan, but it doesn’t come without risks. A lot can go wrong and you need to know how to avoid these pitfalls, or alternatively, know how to reduce them. It’s always best to seek expert advice, especially if you’re new to the game, but here are some general tips.

What are the risks?

Any investment is going to come with risks. It’s all about understanding how to reduce them and manage them.

Knowing that investing in real estate comes with its own set of gambles doesn’t mean you should avoid it; while property does carry risk, it’s comparably low compared to other asset classes. One key reason for this is that property is a necessity. This underpins its value and makes it less volatile.

Also, research and good planning can mitigate most of the risks involved.

Vacancy

Australia’s rising population is good for property investors. There seems to be a continual stream of possible tenants to fill vacant properties. If you choose a good property in a high demand area and with good amenities, it’s possible that you will never have to deal with a vacant lot.

However, the possibility of a vacant property is a risk you take. There are plenty of things you can do to mitigate this risk including minor renovations or refurbishments, ensuring your property is pet-friendly or by looking at a wider pool of tenants.

Undesirable tenants

Not every tenant you choose is going to be well behaved and you need to understand this before you start choosing. Some may not treat your property well, some may not pay rent on time, and some may even skip town in an attempt to avoid all costs. Sometimes, it’s impossible to see who these shoddy tenants are. In some cases, even the best tenants may turn purely because of a change in personal circumstances, for example, a loss of employment.

To avoid this, it’s best to have a property manager on hand. Often, a property manager will be able to recognise the unpleasant tenant from the good ones because they have experience in the matter. They’ll advise who to choose and then perform regular checks on the property. It’s also recommended that you get insurance to cover anything unexpected.

Change in circumstances

Risks in investing don’t just revolve around the tenant’s circumstances. You may experience change as well.

What happens if you suddenly fall ill, lose your job or split with your partner? Any of these situations can result in you not being able to afford the mortgage repayments on an investment property.

To avoid this happening, take out insurance on your property and for you. This may seem like an added and unnecessary expense, but it’s always best to be prepared.

Interest rate change

While at the moment the interest rate is great for investors, this may change. And with banks already having to manage the compulsory interest rate change for investors, it’s likely that this will impact investment property portfolios.

Also, as with anything in life, the interest rate will change and it will rise, so it’s important to be prepared. Never over-commit because you’re confident in a current interest rate. Ensure you can pay all repayments, even when the interest rate goes up. Talk to experts about what to expect in the coming years so you can prepare for it.

Consider keeping a financial buffer in place, such as a line of credit or offset account attached to the loan so you are prepared for any financial changes. Also, speak to an expert about the kind of loan you have taken out and whether it’s advisable to change it to a fixed or partially fixed loan.

Unexpected maintenance

It may look bright and shiny now but in a few years time, your property may need a facelift, and over time, there will definitely be some maintenance issues.

This is where a property manager can help out. By inspecting the property regularly, your property manager is a trustworthy source for whether maintenance is necessary, and whether it needs to be more than just a routine fix.

Never ignore maintenance issues, especially if they seem routine and mundane, because they can grow to something bigger.

Make sure you have a financial buffer to cover any expected and unexpected upkeep costs. Appliances need to be changed, walls occasionally need to be painted and bathrooms sometimes leak. Be prepared for these so you don’t run the risk of losing good tenants because you can’t afford to fix something.

Fluctuating housing market

The housing market peaks and dips and this variation is a risk you take when purchasing an investment property. The cyclical nature of the property market is largely dictated by economic factors, consumer sentiment and spending. To control the risk better, choose your property wisely, by considering location, amenities, condition and extra features.

Reducing the risks

There are some key things you can do to mitigate the risks involved in property investment.

Do your homework. Ask the right questions of agents and experts, choose your location wisely, and look at properties carefully before jumping in.

Ask the right questions of agents and experts, choose your location wisely, and look at properties carefully before jumping in. Choose your finance wisely. Purchasing an investment property is just as much about the loan as it is about the property itself. Finding a good loan deal can mean a huge difference to the net return on your investment and can significantly reduce financial risks associated with investing. Having a trustworthy lender behind you also means you can approach them for help when needed.

Purchasing an investment property is just as much about the loan as it is about the property itself. Finding a good loan deal can mean a huge difference to the net return on your investment and can significantly reduce financial risks associated with investing. Having a trustworthy lender behind you also means you can approach them for help when needed. Diversification is key. If you’re going to have a property portfolio, steer clear of choosing one particular area, but rather, look to purchase many types of properties in many locations.

Read More

Ultimate List Of Abc Of Personal Finance Investing And Accounting

Between personal finance, investing, and accounting there are a lot of vocabulary, ratios, and technical terms. If this overwhelms you, then I have a special post for you today. Read on to see the ultimate ABC list for personal finance, investing, and accounting terms.

Quick Side Note:

Obviously, there is so much more than what is on this list, these are ones that I thought would be helpful to share! Also, if you like this post leave a comment and maybe I will do a part 2.

Before We Get Started:

Here are some other popular posts you may be interested in:

A is for Assets

If you are familiar with a company’s balance sheet you likely know the equation Assets = Liabilities + Stockholders’ Equity. But, what is an asset? An asset is something that will provide some sort of future economic benefit to a company. For example, land, inventory, building, cash, they can all be used in some way to generate sales, revenue, or other benefits in the future.

B is for Balance Sheet

As explained before the Balance is one of the 4 crucial financial statements that shows a company’s financial position at one point in time. The balance sheet can also be applied to your own life to understand what assets you have, minus any liabilities, leaving you with your approximate net worth. For example, if you own a $400,000 house and have $15,000 in the bank, but owe $200,000 in mortgage payments your net worth might be considered $215,000. Although, Robert Kiyosaki might argue differently about your house as an asset. Anyone who is familiar with Rich Dad Poor Dad knows what I am talking about!

C is for Current Ratio

One of the most common liquidity ratios when analyzing the financial position is the current ratio. It is calculated as Current Assets/Current Liabilities. Think about it, if you have $100 in short-term assets but owe $200 in short-term liabilities, you are unable to fulfill these payments without drawing down on more debt. This is why many investors want to see a current ratio of at least 1 or even higher for a better margin of safety.

D is for Debt

People are familiar with debt, but it comes in all different forms including student loans and credit cards. Debt provides leverage to companies because the interest expense is tax deductible and it only requires a fixed payment. For example, a $1,000,000 loan with a 5% interest rate requires an interest expense of $50,000 every year, but nothing more. Then, this $50,000 can be written off on the income statement before taxes, thus lowing taxable income and the amount of taxes paid. But, since it is a fixed obligation, even if the company has a rough year they need to figure out how to pay it.

E is for Equity

Equity is the alternative financing method to debt. When you invest in a stock, you are essentially buying equity or a small piece of the company. Equity is one of the popular financings for deals on shark tank. An entrepreneur comes in asking for $500,000 in exchange for 20% of their company. This is implying a valuation of $2,500,000 for the company since 100%/20% = 5 and 5 x $500,000 = $2,500,000. Yes, this is one of my favorite shows and if you want to learn more about it check out this post here:

F is for Forward PE

PE is a measure of Price/Earnings. If a stock is trading at $100 per share with EPS, earnings per share, of $5 this would be a PE of 20. Forward, PE is essentially the same calculation but with projected EPS. This is why sometimes on Yahoo Finance the regular PE won’t be available but the forward be is. This implies negative current EPS, but positive EPS in the future, which allows you to calculate the Forward PE.

G is for Gain

Gain is used for a lot of different reasons. If a company buys land and later sells it for more than the original cost this is called a gain, as long as it is not in the normal course of the business. In other words, if the company exists solely to buy and flip land, this would more than likely just be considered revenue. But, if a technology buys land for their office building but decides to relocate and sells the land for more, this would appear on the income statement as a gain. Gain is also what investors use to talk about their stocks market performance, usually in percentage or dollar terms.

H is for Hold

When reading analyst reports you will usually see variations of 3 different opinions, buy, sell, and hold. Buy and sell opinions are easy to understand and hold falls in the middle of the spectrum. It is a suggestion that if you do not currently own the stock, hold off on buying. But also, if you are a stockholder, it does not mean sell, just hold. Basically, do not initiate a transaction either way.

I is for Institutional Investor

People like you and me are considered retail investors, but companies with billions of dollars to invest are institutional investors. This can include hedge funds, financial service companies, higher education, companies investing pensions on behalf of their employees, mutual funds, and other similar investors.

J is for Junk Bonds

When it comes to bonds there are two classes of junk bonds and investment grade. The classification depends on their credit rating. The lower the rating, the higher the chance the bond will default and not make the payments. However, a lower rating means a higher potential yield, making these bonds much riskier. Typically below a BBB rating is considered junk bond territory.

K is for Kangaroos

This was actually one I was unfamiliar with and I had to do some research to find a K term. Supposedly, kangaroos are the slang name for Australian shares that are traded on the Australian Stock Exchange which is called All-Ordinaries Stock Exchange. I learned this from Investopedia so check out their article here.

Read More